Caught long in a bubble...!!

due diligence (noun)
(i) the care that a reasonable person exercises to avoid harm to other persons or their property
(ii) research and analysis of a company or organization done in preparation for a business transaction

I'm talking about the second definition and why it is so important. Say, you come across this one investment which really appeals to you. And since you've been a good stock picker you trust your instincts and go for it. Of-course you analyze the fundamentals and nothing seems terribly wrong, maybe a few line items here and there, but nothing serious. Seeing that you have started acquiring this stock, the market reacts favorably and all those stupid "sell-side" analysts issue positive ratings.

Somehow, it occurs to you that this could be the next big thing, so you lever up your investment, which essentially means you borrow. The banks think this looks like a good investment too, so they also lend to you at favorable rates. Slowly you start to build up a significant position in this stock. It has been some time since you've started building up a position, and now you are pretty close to filing form 13D.

Then......without anticipation, the stock starts going the other way. It is now moving against the market...and you are left wondering whats going on. After a few weeks of decline, the stock starts gaining again. You think maybe the market reacted foolishly previously and that you are back on track. A few days of up movement turned out to be a "dead cat bounce".

Then one day...the bubble bursts...and its a free fall. Due Diligence failed and you suddenly discover that the books were never audited. You are getting margin calls every day, margins you can't meet. You can't get out of the stock because now its turned illiquid.....the debt can't be rolled over anymore cause now the bankers have started talking to one another...and they are talking about you.

This just one example of how the cardinal principle of investing was violated.
Rule#1: Don't lose money
Rule#2: Follow rule #1